Tuesday, February 05, 2013

The Great Inflationary Role Model Breaks Down

Argentina has for years served as a role model for inflationists, with the tale being that it devalued in 2002 and after that recovered. But as I've pointed out before, what needs to be noted is that much of its alleged boom is a pure hoax. Argentina's official statistics is perhaps the world's most unreliable, as unreliable or more than what Greek budget data used to be. They are in fact so unreliable that the IMF has formally censured Argentina for putting out inaccurate data, and is threatening to expel Argentina if they don't improve. In particular, the inflation data published is the laughing stock of all Argentinians (and us non-Argentinians as well) as it is far below what they experience. And since real growth is a function of nominal growth deflated by inflation, a too low estimate of inflation implies a too high estimate of real growth, so besides underestimating inflation, Argentina has also vastly overestimated its real growth rate.

And secondly, to the limited extent that the Argentinian boom actually happened, it wasn't related to devaluation, but rather the fact that the prices of the commodities it exports soared even in U.S. dollar terms for reasons causally unrelated to the devaluation in the years after it happened.

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